Monday, April 18, 2011

"Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," the agency said in a statement.

If large U.S. budget deficits and rising government indebtedness are news to you, then you shouldn't be making investment decisions. A smart investor doesn't need to wait for S&P to figure out that the U.S. government has a huge problem—that problem has been obvious for at least the past two years. What is amazing is that the market today had a negative reaction to the S&P announcement of the obvious. That sounds like a buying opportunity to me.

Ratings agencies rarely are the first to uncover important changes to the fundamentals behind a security or a country. More often than not, they are the last ones to figure out what is going on. Smart investors need to understand and react to changing fundamentals long before they are revealed in a rating agency press release. Ratings agencies cannot pay enough to hire staff smart enough to routinely beat the market.

The irony of today's announcement is that we are not on the cusp of some new and serious deterioration in the fiscal fundamentals of the U.S. economy. On the contrary, we are now on the cusp of what could prove to be a new and very positive trend in the fiscal fundamentals. For the first time in many years, Congress seems finally aware that it must make some serious attempt to cut spending. If the analysts at S&P were on top of their game, they would have upgraded the outlook for the U.S. today.

16 comments:

The nerve of those sanctimonious twits at S&P, who take money to give favorable credit ratings to any piece of paper with a smudge on it, but now imperiously pronounce the United States may be less than credit worthy.

What'sa matter S&P, is this payback time for legislation that may limit your gravy train? That is, somehow end this eternal charade by which issuers pay credit rating agencies for the "investment grade" mark they need?

And let us see, S&P. you did warn us about the RMBS collapse, when?

Still, the USA needs to put debt reduction higher on the front burner. National security, some entitlements just have to take the a back seat for a while.

For myself, investing ( or shorting ) gold is like playing poker with sharks. No way I can win. You can read this article about UT endowment buying physical gold to get a sense of the high stakes being played out. The whole gold phenomenon is fascinating – it’s financial value having very little to do with it’s productive value. And notional contracts far exceeding physical availability. Are we going to be bailing out investment banks that were on the wrong side of these deals next?

For myself, investing ( or shorting ) gold is like playing poker with sharks. No way I can win. You can read this article about UT endowment buying physical gold to get a sense of the high stakes being played out. The whole gold phenomenon is fascinating – it’s financial value having very little to do with it’s productive value. And notional contracts far exceeding physical availability. Are we going to be bailing out investment banks that were on the wrong side of these deals next?

I agree, it is probably way less time today to "earn a suit" in labor hours than in 1800s. But that is more a story of capitalism working than socialism failing. We are massively more productive today.

the topic at hand is our government trying to borrow and spend our way to prosperity. ("we need to spend more or we'll go broke" --our veep) At the rate we've been going in the last two years it will once again require many more labor hours to earn a suit once again!!

No need. I picked up several of the Zim notes last year on our trip to Africa. I also have a pile of million-peso notes from Argentina. I was there when they were first issued in the late 1970s, and had a value of about $2,000 US. When they went out of circulation about 5 years later they were worth about 25 cents.